Data Remains Mixed
Opinion: The indexes closed higher Friday with positive internals as volumes declined from the prior session. Our near term outlook remains neutral based on the current chart conditions and the mixed signals coming from the data dashboard. However, we continue to be concerned for the more intermediate term outlook as internal breadth remains weak, especially among the small and mid-cap issues, valuations remain historically extended and a handful of stocks that are keeping the large cap indexes afloat camouflage what we see as underlying market weakness.
- On the charts, all of the indexes closed higher Friday with positive breadth as volumes declined from the prior session. All closed near the middle of their intraday ranges. The MID (page 4) did manage to close above near term resistance while the DJI (page 2) and DJT (page 3) tested their respective resistance levels but were unable to surpass them. The DJT is now overbought on its stochastic reading. Given the closing levels and volumes traded, we view the charts as suggesting some further sideways trade over the near term.
- The data is a mixed bag with all of the McClellan OB/OS Oscillators in neutral (NYSE:+2.26/-7.32 NASDAQ:+10.35/-5.79) as well as the Equity Put/Call Ratio at .67 and the AAII Bear/Bull Ratio at 30.55/30.77. The Total Put/Call Ratio (contrary indicator) shows the crowd long puts at .94 while the OEX Put/Call Ratio (smart money) finds the pros long puts as well at 1.76. So given the wide range of data signals, there is no strong directional message being sent, thus also implying some sideways action as most likely.
- We continue to be concerned for the more intermediate term as breadth remains poor with the NASDAQ A/D remaining below its 50 DMA and making a lower high and the unweighted Value Line Arithmetic index that expresses the broader market conditions by leveling the playing field where large cap weighing has no influence remains in an intermediate term downtrend. The forward p/e for the SPX at 16.6X also implies stocks are far from cheap. And while stock buybacks have been supporting earnings for large companies, revenue projections from the Q3 announcements have been largely negative.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.02% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $125.78 versus the 10 Year Treasury yield of 2.26%.
SPX: 2,020/2,102
DJI: 17,150/17,903
COMPQX; 4,923/5,123
DJT: 7,895/8,330
MID: 1,394/1,465
RUT: 1,145/1,180